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The 80-20 Rule for Business Profitability

Published by Adam Hale on 18 Jul 2018

Ask yourself the following questions:

  1. How well do you know your customers?
  2. Do you know which of your customers take up the most of your time?
  3. Do you know which of your customers is the most profitable?

To figure out the answer to these questions you will need to apply the “80-20 rule,” also known as the “law of the vital few,” for your business. In layman’s terms this rule means that 80% of your profits come from 20% of your customers. 

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Once you identify your top 20%, you need to focus on making sure this group of customers remain satisfied. By understanding what makes this group more profitable, you can work on bringing more of your customers into this same category. Sometimes it only takes a follow up phone call to see how their purchase is working for them or even just a little extra attention the next time they visit your place of business or make an online purchase. 

You should keep in mind that it’s not always profits that make a good customer. There are many other things factors that are important as well, such as frequency of orders, speed of payment, reliability of their business, and even a customer that you enjoy doing business with. Talking to your employees can help you soon come up with a list of your top customers. 

Another way to look at the 80-20 rule as it applies to your business is that perhaps 80% of your problems and complaints come from 20% or fewer of your customers. Once you identify your problem customers, you can change the way you do business with those customers and reduce your problems. You may consider changing your pricing for the problem customers so that you’re paid for the extra time and effort you put in to taking care of them. Of course, there will be times when the only solution is to inform the customer that you are no long able to do business with them. 

When you fully understand your customers and the impact that they can have on your business, you will be able to improve your bottom line. At Summit CPA we offer multiple resources to help you get your business on the right track. If you need assistance contact our office at (866) 497-9761 to schedule an appointment with our advisors.

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